Gdp And Economy Of Less Developed Countries Economics Essay

In the present day’s world, the economy of less-develop countries is rising. Some people live for their work. Some countries move forward all the time whereas some of them are taking a step backward or staying in the same position as before. What I mean by this is that we have to find equipment for measure domestic economy in each country.

Gross domestic product (GDP) measures the output made in the domestic economy, regardless of who owns the production inputs. Furthermore, ‘GDP is the value of net output of the factor of production located in the domestic economy. It can be measured in three equivalent ways: value added in production, factor incomes including profits, or final expenditure’. (Begg, Fisher and Dornbusch, 2003:286)

What’s more, The evaluation of GDP includes all of changes in market price such as inflation and deflation. ‘In order to abstract from changes in overall price level, another measure of GDP called real GDP is often used. Real GDP is GDP evaluated at the market prices of some base year. For example, if 1990 were chosen as the base year, then real GDP for 1995 is calculated by taking the quantities of all goods and services purchased in 1995 and multiplying them by their 1990 prices.’ (Cliffsnotes.com, 2009)

GDP can define by four parts

Market value Security’s last report sale price or its current bid and ask prices. When we measure total production, we must add together the all of productions. In addition, the price as determined by dynamically by buyers and seller in open market also called market price.

Final Goods and Services When calculate GDP, we value the final goods and services that are bought by its final user during a specified time period. There are available for purchase by ultimate or intended user with no plan for further physical transformation or as an input in the production of other goods that will be resold. For example, Canon camera is a final good, but a lens of camera is an intermediate good.

Produced within a country All Goods and services that are produced within a country, is a part of that country’s GDP. For example, Addias is the German sportswear company that produces t-shirts in Thailand, the market value of those t-shirts is part of Thailand’s GDP, not part of GDP in Germany. Shiseido, a Japanese cosmetic company, produces some skincare lines in U.S.A, the production of those skincare products is part of GDP in U.S.A, not part of Japan’ GDP.

In a given time period GDP measure the value of production that take place within a specific interval of time. Normally that interval is a year or a quarter but we have no measured GDP per monthly. Furthermore, GDP measures the economy’s flow of income and expenditure during that interval. The equality between the value of total production and total income is important because it shows the direct link between productivity and living standards. (Parkin, Powell and Matthews, 2008:470)

Standard of Living

Standard of living using the product or services (level of consumption) by group, the judgment of the observer as presented to what constitutes a high or low scale. ‘The measure most frequently used to estimate standard of living is gross nation income per capita.’ (Investorwords.com, 2009) So, there are not includes only the equipment articles of consumption but also the number of dependents in the surroundings, family, education, health and social services. On other hand illiteracy, unemployment, low incomes, crowded living condition, drought, war, may bring a drop in the standard of living. For example, industrialized nations tent to have a higher standard of living than developing countries. Besides, “Standard of Living, It is also referred to as the level of economic welfare, utility or real income. It refers to the level of material well-being of an individual or household. In economic analysis, the standard of living has been usually held to be determined by the quantities of goods and services (including leisure) consumed.” (C.S.Nagpal, 2000:324)

Real GDP and Standard of living.

Economists are required to compare the standard of living between different countries or between difference time periods and estimate the standard of living in a specific year in a particular country by taking the total worth of products and services produced in that country, annually and separating by population. Producing the total value of goods and services is called real Gross Domestic Product, or real GDP. GDP is generally measured in dollars. While the Japanese measure their GDP in yen to dollars. We can trade yen to dollars; we can do such a conversion by using the yen/dollar exchange rate to compare it.

When we compare GDP across time, we would like to adjust for inflation, which is a general change in prices. For example, if we produced 100 bags of sugar at a price of $0.50 each last year, and this year we produce 100 bags of sugar at a price of $1.50 each. If we said that our GDP increased three times from $50 to $150 that’s mean we were calculating nominal GDP, which is the total dollar value of goods and services. Nominal GDP is a deceptive measure of the standard of living. For the reason that, we produced the same quantities of 100 bags of sugar each year. What’s I mean by this is that real GDP was exactly the same as last year. We adjust nominal GDP for price changes, to arrive at real GDP. We select one year as a base, and we measure price changes relative to that the base year. If last year was the base year, real GDP in the base year was $50. As the price of sugar went up from $0.50 to $1.50, that the price level tripled this year, As a result that our GDP price deflator is 3.0. We can divide nominal GDP in any given year by that year’s GDP deflator to arrive at real GDP. Hence, we divide $150 by 3.0 to obtain the correct $50 figure for real GDP.

Real GDP=Nominal GDP/GDP Deflator

Overall, an increase in nominal GDP has two factors. One factor is the increase in real GDP, which raise the average standard of living. The other factor is average inflation, which does not raise the average standard of living. In a financial system with services and goods, the enlargement in the inferred GDP deflator from one year to the next is a measure of average inflation. Inflation is a general increase in the prices of services and goods.

Growth in nominal GDP = growth in real GDP plus growth in inflation

Averaging standard of living in a country is defined as its real GDP divided by population, or real GDP per capita. This measure of the standard of living is directly related to labor productivity, which is defined as real GDP divided by the total amount of hours worked.

Standard of living = real GDP/population

Labor productivity = real GDP/hours worked

Real GDP/population = (real GDP/hours worked)(hours worked/population)

The ratio of hours worked to population the employment ratio. Hence, the standard of living is means to productivity multiplied by the employment ratio. Then, we can increase the standard of living by raising the employment ratio. Nevertheless that is an artifact of the way that GDP only measure goods bought and sold in the market. It does not include vacation and household work.

An increase in the employment ratio has to be regarded as a reduction in the quality of life. A good argument can be made that productivity is more closely related to the real quality of life, although the ratio of output to population is commonly used to measure the standard of living. Therefore, it is significant to compare labor productivity across time and across countries than to evaluate the standard of living.

In contrast, Employment ratio will mean more people for working-age population to support, if the employment ratio can change because of demographics. The extent output, population and hours work tend to grow geometrically. (Kling Arnold,Ph.D., 2009)

Limitations of real GDP when measuring living standard of living

Using estimates of real GDP for three main intentions.

Economic welfare comparisons over time

Economic welfare comparisons across countries

Business cycle forecasts Economic welfare comparisons over time

Economic welfare is an inclusive measure of the general state of well-being. This will be improve when all the goods and services grows by the production per person. The goods and services that make up real GDP growth are only a part of all items that influence economic welfare. “In 2006, because of real GDP growth, real GDP person in the United Kingdom is twice what it was in 1976. But are we twice as well off?” (Parkin, Powell and Matthews, 2008:480) It is mean real GDP depends on various factors that are not measured or measured accurate by real GDP.

A number of these factors are:

Quality Improvements

The price indices can measure inflation give an upward-biased estimate of factual inflation. Normally, if we allow too much for rise in price, we take too lightly for growth of real GDP.

Household Production

The majority of production takes place every day in our home. Washing dishes, using computer and watching television are all examples of the productive activities that not involve market transactions and are not counted as part of GDP. However these activities grew at the same rate as real GDP and these are not measure them would not be problem. Nevertheless it is likely that market production is gradually more replacing household production, which is not part of GDP.

Underground Economic Activity

The underground economy is out of sight from view by the people operating in it to avoid taxes because the productions are illegal. What’s more, activity is unreported, it is absent from GDP.

Health and Life Expectancy

A higher real GDP does enable us to spend more on medical research, healthy food, the quality hospital,

Leisure Time

Leisure time is an economic high-quality that include to our economic welfare. Other factors remaining the same, the better off we are. Working time is valued as a part of GDP, but leisure is not.

Environmental Quality

Economic influences the quality of environment. Using car, rubbish from industries, the pollution of machine tool. Resources used to protect the environment are valued as a part of GDP. However we are not count the polluted from the atmosphere as a part of GDP.

Political Freedom and Social Justice

The majority of people evaluate Political Freedom and Social Justice should go to the same direction but in the real situation is not. A country might have a huge GDP but have limited political freedom. On the other hand they might have less social justice. For the example, Chain is the fastest-growing economy but they have limited political freedom.

Economic Welfare Comparisons

Firstly, the real GDP of one country should be changed into the same currency unit as the real GDP of the other country. Secondly, the same prices must be used to value the good and services in the country being compared. Hence, the real GDP must be use for make international comparisons of economic welfare. However, real GDP comparisons are a major component of international welfare comparisons and two special problems arise in making international comparisons.

Business Cycle Forecast

If policy makers plan to increase interest rates to slow an expansion that they believe is too strong, they look at the least estimates of real GDP. Business cycles are the irregular fluctuations in total economic activity observed in all developed market economic. Collection economic activity is measure by real GDP, the whole weighted by market prices, of all goods and services produced in an economy. The fluctuation in economic activity measured by real GDP tell business cycle that the economy is in. when real GDP grow, the economy is in a business cycle expansion and when real GDP shrinks, the economy is in a recession. Also, as real GDP fluctuates, so do production ad jobs. But real GDP fluctuations probably exaggerate or overstate the fluctuations in total production and economic welfare. (Parkin, Powell and Matthews, 2008:480-483)

How to calculate Nominal GDP and Real GDP

Nominal GDP is GDP of country that evaluated at current prices of goods and services. On the other hand, Real GDP is GDP of country that evaluated the value of productions for a given year at base year. For example, an economy producing printers and digital cameras in the year 2005

So, Nominal GDP 2005 = $(P printers * Q digital cameras + P digital cameras * Q printers)

*P = Prices, Q = Quantities

Table 1.1

GDP Data for 2005

GDP Data for 2008

Item

Quantity

Price

Quantity

Price

Printers

100

$10.00

150

$30.00

digital camera

150

$30.00

175

$32.00

From the following data in the table 1.1, we can evaluate real GDP by using year 2005 to be as base year

So, Real GDP2005 = $ (P2005 printers * Q2005 printers + P2005 digital cameras * Q2005 digital cameras)

= $ (10*100 + 30*150)

= $ (1,000 + 4,500)

= $ 5,500

Then, Real GDP2008 = value of the 2008 quantities at 2005 prices

= $ (P2005printers * Q2008printers + P2005digital cameras * Q2008digital cameras)

= $ (10*150 + 30*175)

= $ (1,500 + 5,250)

= $ 6,750

Afterward, Comparing how many percentage that an economy in year 2008 has growth from year 2005 (as base year)

So, = $ (6,750 – 5,500) * 100 = 22.73%

$5,500

That is mean, an economy in year 2008, calculated and compared by real GDP measurement, has growth from year 2005 at 22.73 percentages.

Generally, higher GDP is seemed to be better than lower GDP because more output produced mean higher potential standard of living. On the other hand, higher GDP doesn’t promise that happiness is increasing because GDP often goes up when bad situations happen. For example, this table chart below illustrates the percentages of Singapore’s GDP and China’s GDP in 2006-2008. Overall, it is clear that even China has had higher GDP real growth rate than Singapore but Singapore still has had higher

GDP per capita than China. That is mean, Singapore’s standard of living is better than China Standard of living.

Table 1.2

Singapore

China

GDP Real Growth Rate

1.1% (2008 est.)

country comparison to the world: 175

7.8% (2007 est.)

8.4% (2006 est.)

9% (2008 est.)

country comparison to the world: 16

13% (2007 est.)

11.6% (2006 est.)

GDP per capita (ppp)

$ 51,500 (2008 est.)

country comparison to the world: 9

$ 51,600 (2007 est.)

$ 28,500 (2006 est.)

$ 6,000 (2008 est.)

country comparison to the world: 133

$ 5,500 (2007 est.)

$ 4,900 (2006 est.)

*note : data are in 2008 US dollar

Education expenditure

3.7% of GDP (2001)

1.9% of GDP (1999)

Labor force

2.94 million

country comparison to the world: 103

807.3 million

country comparison to the world: 1

Labor force – by occupation:

Agriculture: 0%

Industry: 27.8%

Services: 72.2%

Agriculture: 43%

Industry: 25%

Services: 32%

Singapore Overviews Economic Singapore has a highly developed and successful free-market economy. It is an outstanding open and corruption-free situation and a per capita GDP higher than that of most developed countries. The economy depend on export, electrics equipment and information technology products. In 2004 and 2007 real GDP growth at about 7% but decreased to 1.1% in 2008. However, “Singapore’s economy is predictable to go a broad-bases slowdown in 2009.” The ministry said in a statement. The economy last saw a full year reduction in 2001 when it shrank 2.4 percent. Singapore, a major trading hub and financial center, has been hit by the sharp slowdown in the United States, Japan and Europe, which has also increased to emerging economic such as China and India.

China Overviews Economy China’s economy in the past 30 years has changed from a centrally planned system that was largely closed to international trade to a more market-oriented economy that has a rapidly growing private sector and is a major player in the global economy. Furthermore, the economy still grew by 9.0% in 2008, the highest growth rate among the major economy in the world. (Central Intelligence Agency, 2009)

In that case, Singapore is a small country if you will compare landscape and population with China. However, the table 1.2 shows china’s economy seem to be grew up in last three years ago by real GDP growth rate. On the other hand, Singapore’s economy fluctuated in the same period times. In fact, these are can not measure or summary that China’s standard of living is better than Singapore’s standard of living. And also, we can uses the measuring of GDP per capita, is the excellent system, to evaluate which countries have healthy financial system. When measured at the table chart that found Singapore’s GDP per capita in 2008 stood at $ 51,500, among the highest in the world. In contrast, China’s GDP per capita in 2008 stood at $ 6,000. The reasons for this are Singapore’s standard of living is better than China because Singapore’s peoples earn more. Therefore, they could spend their money for quality products and services.

In conclusion, GDP or Gross Domestic Product is the summary of produced good and services in the country during a given period. What’s more, GDP is measure by using the expense and income totals in the circular flow model of the expense and income. Real GDP or Real Gross Domestic Products is used to compare an economy between countries during times period as a given based year. Furthermore, Real GDP is not perfect interpretation of economic welfare. However, this measurement is rather useful for comparing the standard of living between countries and also providing the history of the economic growth of those countries. Real GDP is showed by the percentage change in the value of production is year base on an average of the prices in the current year and the previous year. On the other, this measurement does not include household and underground production, environmental damage and the value of health, leisure time and political freedom. In addition, Real GDP across a number of years is used for measuring economic growth.